How Indonesia can realise its digital dividend

Two key factors contribute to Indonesia becoming the greatest digital economy in south-east Asia: the country has the world’s third largest youth population as well as having 130 million social media users.

According to McKinsey’s report ⁽¹⁾, by going digital, Indonesia can bring in USD 150 billion, 10 per cent of GDP and add 3.7 million jobs by 2025.

The report found Indonesia in nascent stages of digitization with a weak ICT (information and Communication Technology) together with inconsistent use of digital technology over business sectors.  However, despite these facts, Indonesians who have embraced digital opportunities are among the world’s most active users.  This, together with the country’s dynamic start-up ecosystem, presents great potential for realising Indonesia’s digital dividend.

Indonesia in the digital age

McKinsey describes four technologies which drive the digital revolution as follows:

• Mobile Internet: Revenues from public cloud services and cloud IT infrastructure show that globally, mobile devices account for around 60 percent of all online traffic.
• Cloud technology: Computer power can be accessed remotely facilitated by cost-effect and efficient connectivity. The year 2014 marked the first time more information workload was processed via the cloud than in the traditional IT space.
• Internet of Things (IoT): In 2015, there were 18.2 billion Internet-connected devices. By 2020, this number is expected to increase threefold, to 50 billion. This is spurring new operating models and innovative products such as driverless cars and smart homes.
• Big data and advanced analytics: In 2016, Internet traffic reached 1 zettabyte— equivalent to 1 trillion gigabytes. Everyday objects are transmitting information every second of their operation, and computers with advanced analytical horsepower are enhancing human decision-making and unleashing the power of big data to optimize supply chains and business processes in sectors as far ranging as healthcare and retail to energy and mining.

These four disruptive technologies are the keys to accelerating the impact of digital in Indonesia. As can be seen in the diagram below, Indonesia has experienced increasing adoption of each technology with 73 per cent of users accessing the internet via mobile devices. The increasing use of these areas is effectively laying a solid foundation for future investments and productivity gains (Exhibit 1). As the McKinsey report states, “while these are early days, the digital revolution has arrived in Indonesia.”

 

 

Digital momentum

Digital financial services are an ideal means of addressing financial inclusion, with Indonesia having the world’s third largest unbanked population. An Indonesia Banking

A survey performed by PricewaterhouseCoopers shows that the number of people who mostly banked through traditional branches (over 50 percent of their total transactions) dropped from 75 percent in 2015 to 45 percent in 2017.

Digital transactions are increasing in adoption rate.  The e-money facility, mostly used by lower income individuals, has increased by 3.7 times between 2014 and 2017, while e-commerce revenues increased by 22 percent between 2016 and 2017.

The use of big data and advanced analytics increased by 60 per cent between 2014 and 2015.

As the figure shows, Indonesia’s digital landscape has expanded in recent years — ranging from increased use of big data and mobile internet, to the rise of digital financial services and e-commerce. The use of big data and advanced analytics increased by 60 percent between 2014 and 2015, while the number of mobile internet users grew by 13 million between 2015 and 2017.

 

 

According to the IMF, Indonesia’s growing youth population is a fast adopter of these technologies and constitutes a sizeable customer base for the digital economy. This is evident in the country’s over 1,700 digital start-ups, trailing only behind the United States, India, and United Kingdom.

For example, Go-Jek, which was established in 2010 as a motorbike ride-hailing phone service with a fleet of twenty drivers, evolved into a popular on-demand mobile platform. The “super app,” as it has been coined, now provides a wide range of services, including transportation, mobile payments, and food delivery with a fleet that exceeds 400,000 drivers.⁽²⁾

 

Expanding the digital opportunity

There are various stumbling blocks to Indonesia embracing the digital opportunity.  These include the country having one of the lowest internet penetration rates in the ASEAN region.  This can probably be attributed to the low quality of internet and bandwidth size together with slow connection speed which cannot be compensated by the fact that the country’s internet is affordable.

The recent IMF annual economic assessment  report focused on reforms that support innovation and job creation to boost potential growth and economic diversification in Indonesia.

• Particularly for the digital economy, these priorities focus on ⁽²⁾:
• Enhancing the country’s infrastructure to access information and technology.
• Upgrading workers’ skills—particularly digital literacy—to meet the demands of
• the digital economy.
• Streamlining regulations and encouraging the entry of foreign firms and skilled
• labour to further boost competition and stimulate innovation.

Despite the fact that the starting point of internet adoption in Indonesia is still in its infancy, the country has started to embrace the digital revolution.  According to the IMF ⁽²⁾ in order to accelerate progress, the country’s public and private sectors must focus investments in digital technologies to enhance infrastructure, increase penetration, and boost productivity.

As McKinsey report aptly states ⁽¹⁾:  The resulting economic impact— USD 150 billion annually by 2025—is too large a prize to ignore. Implementing a holistic digital strategy will enable Indonesian companies to win in the digital age and lift Indonesia’s economic growth to the next level.

 

References

1. https://www.mckinsey.com/~/media/McKinsey/Locations/Asia/Indonesia/Our%20Insights/Unlocking%20Indonesias%20digital%20opportunity/Unlocking_Indonesias_digital_opportunity.ashx
2. https://blogs.imf.org/2018/02/22/a-digital-savvy-indonesia/